Stocks are about to take the next big test

Corporate earnings season picks up steam Wednesday, and that will be the next big test for stocks.

Big financials — Bank of America, Wells Fargo and BlackRock — report ahead of the opening bell, following J.P. Morgan's disappointing results late Tuesday. J.P. Morgan earned $1.32 per share, excluding $2.2 billion in tax benefits and other items. Volatile financial markets hit revenues, which fell 6.4 percent to $23.5 billion. J.P. Morgan is seen as a bellwether that could set the tone for the rest of the sector.

Earnings could be a particular challenge for stocks this quarter, with analysts expecting a 4.8 percent decline in S&P 500 profits, according to Thomson Reuters. So far, there's been a trickle of reports, but the season gains momentum Wednesday with results from the major financials and others, like Delta Airlines, Kinder Morgan and Netflix reporting after the close.

Stocks have rallied back from the late-summer sell-off in recent sessions as fears of a China-led global slowdown faded slightly, and after weak September jobs growth lowered the odds of a Fed rate hike this year.

That has put the onus on each new piece of U.S. economic data, so September retail sales, reported at 8:30 a.m., will be important, as will the Fed's Beige Book on the economy.

Traders will also be looking to Chinese inflation data overnight. China Tuesday reported that imports fell 20 percent in September due to weak domestic demand, and that triggered a sell-off around the world. But the reaction was muted compared to what it might have been several weeks ago, and Shanghai stocks finished higher.

The Dow fell for the first time in seven days Tuesday, losing 49 points to 17,081. The S&P 500 lost 13 to 2003. The S&P has rebounded smartly, gaining about 7 percent since retesting its August low on Sept. 28.

Traders will also be watching for fallout from Tuesday's Democratic presidential debate. Biotech stocks Tuesday tumbled amid concerns front-runner Hillary Clinton and other Democrats will focus on pricing in the industry, after Clinton raised pricing as an issue several weeks ago. The IBB, iShares Nasdaq Biotechnology ETF was down more than 3 percent, ahead of the Tuesday evening debate.

"Some people invested in health care and restaurants were a little bit nervous ahead of that debate," said John Canally, economist and market strategist at LPL Financial. Canally said one concern for consumer stocks, like restaurants, is that the candidates will support higher minimum wages. Banks could also come under fire, if there is discussion of more regulation.

"The odds of something happening are slim to none in 2017 but there's headline risk for stock groups that are overvalued," he said.

The September retail sales number could be especially key for markets, as traders continue to contemplate the economic reports that could influence the Fed's decision on rates after September's surprisingly weak jobs report. Retail sales are expected to rise 0.2 percent, while core sales, excluding autos, gasoline and building materials, are expected to rise 0.3 percent.

"We have to get a better read on third-quarter GDP. Is it below 1? is it over 2? The way the market is acting you this it's going to be below 1 percent. We think it's between 2 and 2.5 percent, and the retail sales are going to be part of that," said Canally. "The vehicle sales strength, the auto strength that's going to be in there is well known. It's really what happened outside of that."

Besides retail sales, there is PPI producer price inflation data at 8:30 a.m. Business inventories are released at 10 a.m. ET, and the Fed's Beige Book on the economy is released at 2 p.m. ET.

John Briggs, head of strategy at RBS, said retail sales is the big number. "Did the job slowdown spread into spending? Or is the consumer able to weather this?" he asked, noting both the slight slowdown in job creation and financial market volatility. "Does that translate into softer spending? I think retail spending is fairly important. It's about consumer psyche and how vulnerable they may or may not be to developments."

Traders continue to handicap the likelihood of an October rate hike, even though chances are viewed as slim. According to RBS, markets currently give just a 6 percent chance to a Fed rate hike at its Oct. 28 meeting and 38 percent odds to December.

"We just had two governors out being dovish. There continues to be some inconsistency in their message," said Briggs. "It feels like investors at this point are reluctant to position on the back and forth of Fed speak. At this stage, it seems they're more likely to wait to see what they actually do." Fed Gov. Daniel Tarullo Tuesday told CNBC's Steve Liesman that based on current information on the economy, it would not be appropriate to raise rates this year. Fed Gov. Lael Brainard made similar remarks, although Fed Chair Janet Yellen has continued to say she would like to raise rates this year.

Just a few of the S&P 500 companies have reported, and so far earnings have mostly come in above expectations in more than 70 percent of the reports, but the revenues have been less robust. Just 48 percent of companies so far beat revenue estimates, according to Thomson Reuters.

Companies in the financial sector are expected to show an average 7.5 percent earnings gain, according to Thomson Reuters. The worst sectors are expected to be energy with a 65 percent earnings decline and materials, with earnings off by 20 percent. Consumer discretionary and telecom are seen to be the biggest gainers, with earnings growth of about 11 percent each.